The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described below in the section entitled "Information Regarding Forward-Looking Statements" and in "Part I, Item 1A, Risk Factors" of our Annual Report on Form 10-K for the year ended January 3, 2009, as filed with the SEC on March 24, 2009.

Overview of the Company

The Company is a provider of high-technology, digital-based printing solutions to the commercial print segment of the graphics communications industry. The Company designs, manufactures and distributes proprietary and non-proprietary solutions aimed at serving the needs of a wide range of print service providers worldwide. Our proprietary digital imaging and advanced technology consumables offer superior business solutions for commercial printing focusing on the growing need for short-run, high quality color applications. We are helping to lead the industry's transformation from analog print production methods to digital imaging technology. We are a leader in the development of advanced printing systems using digital imaging equipment, workflow and consumables-based solutions that economically benefit the user through streamlined operations and chemistry-free, environmentally responsible solutions. We are also a leading sales and service channel across a broadly served market in the small to mid-sized commercial, quick and in-plant printing segments.

Through our various operations, we:

ˇ provide advanced digital print solutions through the development and manufacture of digital laser imaging equipment and advanced technology chemistry-free printing plates, which we call consumables, for commercial and in-plant print providers targeting the growing market for high quality, fast turnaround short-run color printing;

ˇ are a leading sales and services company delivering Presstek digital solutions and solutions from other manufacturing partners through our direct sales and service force and through distribution partners worldwide;

ˇ manufacture semiconductor solid state laser diodes for Presstek imaging applications and for use in external applications; and

ˇ manufacture and distribute printing plates for conventional print applications.

We have developed DIŽ solution, a proprietary system by which digital images are transferred onto printing plates for direct imaging on-press applications. Our advanced DIŽ technology is integrated into a direct imaging press to produce a waterless, easy to use, high quality printing press that is fully automated and provides our users with competitive advantages over alternative print technologies. We believe that our process results in a DIŽ press which, in combination with our proprietary printing plates and streamlined workflow, produces a superior print solution. By combining advanced digital technology with the reliability and economic advantages of offset printing, we believe our customers are better able to grow their businesses, generate higher profits and better serve the needs of their customers.

Similar digital imaging technologies are used in our CTP systems. Our Presstek segment also designs and manufactures CTP systems that incorporate our technology to image our chemistry-free printing plates. Our chemistry-free digital imaging systems enable customers to produce high-quality, full color lithographic printed materials more quickly and cost effectively than conventional methods that employ more complicated workflows and toxic chemical processing. This results in reduced printing cycle time and lowers the effective cost of production for commercial printers. Our solutions make it more cost effective for printers to meet the increasing demand for shorter print runs, higher quality color and faster turn-around times.

We have executed a major transformation in the way we go to market. In the past, we had been reliant on OEM partners to deliver our business solutions to customers. Today, more than 90% of our sales are through our own distribution channels.

In addition to marketing, selling and servicing our proprietary digital products, we also market, sell and service traditional (or analog) products for the commercial print market. This analog equipment is manufactured by third party strategic partners and the analog consumables are manufactured by either us or our strategic partners. The addition of these non-proprietary products and our ability to directly sell and service them was made possible by the A.B. Dick and Precision Lithograining acquisitions, which we completed in 2004.

ˇ Lasertel manufactures and develops high-powered laser diodes and related laser products for Presstek and for sale to external customers.

On September 24, 2008, the Board of Directors approved a plan to sell the Lasertel subsidiary; as such the Company has presented the results of operations of this subsidiary within discontinued operations.

We generate revenue through four main sources: (i) the sale of our equipment and related workflow software, including DIŽ presses and CTP devices, (ii) the sale of high-powered laser diodes for the graphic arts, defense and industrial sectors; (iii) the sale of our proprietary and non-proprietary consumables and supplies; and (iv) the servicing of offset printing systems and analog and CTP systems and related equipment.

Strategy

Our business strategy is centered on maximizing the sale of consumable products, such as printing plates, and therefore our business efforts focus on the sale of "consumable burning engines" such as our DIŽ presses and CTP devices, as well as the servicing of customers using our business solutions. Our strategy centers on increasing the number of our DIŽ and CTP units, which increases the demand for our consumables.

To complement our direct sales efforts, in certain territories, we maintain relationships with key press manufacturers such as Ryobi Limited ("Ryobi"), Heidelberger Druckmaschinen AG ("Heidelberg"), and Koenig & Bauer, AG of Germany ("KBA"), who market printing presses and/or press solutions that use our proprietary consumables.

Another method of growing the market for consumables is to develop consumables that can be imaged by non-Presstek devices. In addition to expanding the base of our DIŽ and CTP units, an element of our focus is to reach beyond our proprietary systems and penetrate the installed base of CTP devices in all market segments with our chemistry-free and process-free offerings. The first step in executing this strategy was the launch of our Aurora chemistry-free printing plate designed to be used with CTP units manufactured by thermal CTP market leaders, such as DaiNippon Screen Mfg., Ltd. ("Screen") and Eastman Kodak Company ("Kodak"). We continue to work with other CTP manufacturers to qualify our consumables on their systems. We believe this shift in strategy fundamentally enhances our ability to expand and control our business.

Since 2007, management has been taking steps to improve the Company's cost structure and strengthen its balance sheet in order to enable Presstek to increase profitability on improved revenue growth when economic conditions in the United States and elsewhere recover. An important element of this effort was our Business Improvement Plan, as described in the next section.

In the fourth quarter of fiscal 2007, we announced our Business Improvement Plan ("BIP"). The plan involved virtually every aspect of the business and includes pricing actions, improved manufacturing efficiencies, increased utilization of field service resources, right-sizing of operating expenses, and cash flow improvements driven by working capital reductions and the sale of selected real estate assets.

Since the second quarter of fiscal 2007, headcount in the Presstek segment of our business has been reduced by 16.3%, leased facilities have been consolidated, operating expenses, excluding special charges, have been reduced from $21.5 million in the second quarter of 2007 to $14.7 million in the second quarter of 2009 (excluding the one time charge of $19.1 million for the write off of goodwill), working capital has decreased from $39.8 million at June 30, 2007 to $25.1 million at July 4, 2009, short term debt decreased by approximately $10.4 million from $28.0 million at June 30, 2007 to $17.6 million at July 4, 2009 and in the third quarter of fiscal 2008, the Company completed the sale of real estate property located in Tucson, Arizona, of which the proceeds were used to pay down debt. The sale of this property included a sale-leaseback of a portion of the facility for the Lasertel operations.

The Business Improvement Plan has been completed and there are no further restructuring costs anticipated in 2009 as part of this Plan.

General

We operate and report on a 52- or 53-week, fiscal year ending on the Saturday closest to December 31. Accordingly, the accompanying consolidated financial statements include the thirteen week periods ended July 4, 2009 (the "second quarter and first six months of fiscal 2009" or "the six months ended July 4, 2009") and June 28, 2008 (the "second quarter and first six months of fiscal 2008" or "the six months ended July 28, 2008").

We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.

RESULTS OF OPERATIONS

Results of operations in dollars and as a percentage of revenue were as follows
(in thousands of dollars):

                                    Three months ended                                      Six months ended
                          July 4, 2009              June 28, 2008               July 4, 2009                June 28, 2008
                                     % of                      % of                        % of                        % of
                                   revenue                    revenue                     revenue                     revenue
Revenue
Product              $  26,324         78.6     $ 43,086          83.5     $  53,220          78.3     $  84,476          82.5
Service and parts        7,186         21.4        8,520          16.5        14,750          21.7        17,924          17.5
Total revenue           33,510        100.0       51,606         100.0        67,970         100.0       102,400         100.0

Cost of revenue
Cost of product         17,107         51.1       27,602          53.5        33,484          49.3        53,070          51.8
Cost of service
and parts                5,367         16.0        6,539          12.7        11,356          16.7        13,465          13.1
Total cost of
revenue                 22,474         67.1       34,141          66.2        44,840          66.0        66,535          64.9

Gross profit            11,036         32.9       17,465          33.8        23,130          34.0        35,865          35.0

Operating expenses
  Research and
development              1,164          3.5        1,275           2.5         2,424           3.6         2,638           2.6
  Sales, marketing
and customer
support                  6,884         20.5        7,903          15.3        13,249          19.5        15,323          15.0
  General and
administrative           6,321         18.9        5,416          10.5        12,293          18.1        12,389          12.1
  Amortization of
intangible assets          233          0.7          274           0.5           487           0.7           565           0.6
  Restructuring
and other charges           38          0.1          560           1.1           122           0.2         1,195           1.2
  Goodwill
impairment              19,114         57.0            -           0.0        19,114          28.1             -           0.0
  Total operating
expenses                33,754        100.7       15,428          29.9        47,689          70.2        32,110          31.4

  Operating income
(loss)                 (22,718 )      (67.8 )      2,037           3.9       (24,559 )       (36.1 )       3,755           3.7

  Interest and
other income
(expense), net            (246 )       (0.7 )        185           0.4           214           0.3          (287 )        (0.3 )
  Provision for
income taxes            16,905         50.4        1,219           2.4        16,630          24.5         1,578           1.5

  Income (loss)
from continuing
operations             (39,869 )     (119.0 )      1,003           1.9       (40,975 )       (60.3 )       1,890           1.8
  Loss from
discontinued
operations, net of
tax                     (1,580 )       (4.7 )       (436 )        (0.8 )      (1,665 )        (2.4 )      (1,105 )        (1.1 )
  Net income
(loss)               $ (41,449 )     (123.7 )   $    567           1.1     $ (42,640 )       (62.7 )   $     785           0.8

Three and six months ended July 4, 2009 compared to three and six months ended June 28, 2008

Revenue

Consolidated revenues were $33.5 million and $68.0 million in the second quarter and first six months of 2009 respectively, compared to $51.6 million and $102.4 million in the comparable prior year periods. The decline in revenues was driven primarily by the impact of the recent deterioration in the global economy, the continuing decline in our traditional lines of business, and an unfavorable change in foreign currency exchange rates. Overall, sales of Presstek's "growth" portfolio of products, defined as 34DI and 52DI digital offset solutions and the Presstek family of chemistry free CtP solutions, decreased $10.9 million, or 42%, and $22.2 million, or 43%, in the second quarter and first six months of 2009 compared to the same prior year periods. However, on a sequential quarter basis, the sale of "growth" portfolio products increased by $1.0 million, with improved sales in our 52DI consumables as well as the new Aurora Pro plate.

Equipment revenues were $5.2 million and $10.2 million in the second quarter and first six months of 2009 respectively, compared to $14.5 million and $27.7 million in the same prior year periods. Equipment sales were significantly impacted by the deterioration of the economy and were consistent with declines in global capital equipment markets. Potential customers are delaying purchasing decisions and lenders are delaying financing commitments in anticipation of a continuing sluggish economy. Sales of growth portfolio DI presses and peripherals declined from $12.0 million and $21.8 million in the second quarter and first six months of 2008 respectively, to $3.7 million and $7.3 million in the comparable current year periods. Sales of our remaining growth portfolio of equipment, Dimension, Dimension Pro, Compass, and Vector TX52 platesetters, declined from $2.2 million and $5.0 million in the second quarter and first six months of 2008 respectively, to $1.5 million and $2.6 million in the comparable current year periods. Equipment sales of our "traditional" line of products, defined as QMDI presses, polyester CtP platesetters, and conventional equipment, were also lower in 2009 compared to 2008 due to the sluggish economy as well as the ongoing transition of our customer base from analog to digital technologies. Revenues from our traditional line of equipment products declined from $1.8 million and $3.4 million in the second quarter and first six months of 2008, respectively, to $0.8 million and $1.9 million in the comparable current year periods.

Consumables product revenues declined from $28.5 million and $56.8 million in the second quarter and first six months of 2008, respectively, to $21.1 million and $43.0 million in the comparable current year periods due primarily to lower sales of our "traditional" portfolio of consumables. Sales of Presstek's traditional plate products, consisting of QMDI, other DI, and polyester plates, declined from $11.5 million and $22.7 million in the second quarter and first six months of 2008, respectively, to $7.6 million and $15.8 million in the comparable current year periods, while sales of other traditional consumables products declined from $7.0 million and $14.9 million to $5.5 million and $11.8 million in the comparable periods. Total sales of Presstek's traditional products declined 29% and 27% in the second quarter and first six months of 2009, to $13.1 million and $27.6 million respectively. Sales of Presstek's "growth" portfolio of consumables, defined as 52DI, 34DI, and chemistry-free CtP plates, declined from $10.0 million and $19.2 million in the second quarter and first six months of 2008, respectively, to $8.0 million and $15.4 million in the comparable current year periods, reflecting underutilized capacity in the printing markets resulting from the slow economy as well as customer inventory reductions. Sales of 52DI plates increased in the second quarter and first six months of 2009 compared to the same prior year periods by 14% and 10%, respectively. Overall sales of Presstek's growth portfolio of DI plates declined from $4.8 million and $9.6 million in the second quarter and first six months of 2008 respectively, to $4.3 million and $8.3 million in the comparable current year period. Sales of chemistry-free CtP plates declined by 29% and 26% in the second quarter and first six months of 2009, respectively, from $5.2 million and $9.6 million in the second quarter and first six months of 2008. Sales of Aurora Pro, Presstek's new chemistry-free CtP thermal plate, increased 54% and 39% in the second quarter and first six months respectively, compared to the same prior year periods.

Service and parts revenues were $7.2 million and $14.7 million in the second quarter and first six months of 2009, respectively, reflecting a decrease of $1.3 million, or 16%, and $3.2 million, or 18%, from the comparable prior year periods. The decrease is due primarily to lower parts revenues resulting from the transition of our customer base from analog to digital solutions as well as lower equipment usage due to the sluggish economy.

Consolidated cost of product, consisting of costs of material, labor and overhead, shipping and handling costs and warranty expenses, was $17.1 million and $33.5 million in the second quarter and first six months of fiscal year 2009, respectively compared to $27.6 million and $53.1 million, respectively, in the comparable prior year periods. The decrease was due primarily to lower revenues.

Consolidated cost of service and parts declined from $6.5 million and $13.5 million in the second quarter and first six months of 2008, respectively, to $5.4 million and $11.4 million in the comparable current year periods. These amounts represent the cost of spare parts, labor and overhead associated with the ongoing service of products. The reduction in overall cost is due primarily to lower field service expenses resulting from cost reduction initiatives, as well as lower parts revenues.

Gross Profit

Consolidated gross profit as a percentage of total revenue was 32.9% and 34.0% in the second quarter and first six months of fiscal year 2009, respectively, compared to 33.8% and 35.0% in the second quarter and first six months of fiscal year 2008, respectively.

Gross profit as a percentage of product revenues was 35.0% in the second quarter of 2009 compared to 35.9% in the second quarter of 2008. On a year to date basis, gross profit as a percentage of product revenues was 37.1% in fiscal year 2009 compared to 37.2% in fiscal year 2008. Gross profit has been negatively impacted in 2009 by an unfavorable change in foreign currency exchange rates but has been offset by a favorable mix of higher margin product sales.

Gross profit as a percentage of service revenues was 23.3% and 24.9% in the second quarter and first six months of 2008, respectively, compared to 25.3% and 23.0% in the comparable current year periods, respectively.

Research and Development

Research and development expenses primarily consist of payroll and related expenses for personnel, parts and supplies, and contracted services required to conduct our equipment, consumables and laser diode development efforts.

Research and development expenses were $1.2 million and $2.4 million in the second quarter and first six months of fiscal year 2009, respectively, compared to $1.3 million and $2.6 million in the comparable prior year periods. Favorable spending was due primarily to lower consulting costs and lower parts and supplies expense related to product development.

Sales, Marketing and Customer Support

Sales, marketing and customer support expenses primarily consist of payroll and related expenses for personnel, advertising, trade shows, promotional expenses, and travel costs associated with sales, marketing and customer support activities.

Sales, marketing and customer support expenses decreased from $7.9 and $15.3 million in the second quarter and first six months of fiscal year 2008, respectively, to $6.9 million and $13.2 million in the comparable current year periods. The decline in expenses was due primarily to lower marketing costs resulting from the DRUPA trade show which took place in the second quarter of 2008, as well as lower commission expense due to lower sales.

General and Administrative

General and administrative expenses are primarily comprised of payroll and related expenses, including stock compensation, for personnel and contracted professional services necessary to conduct our general management, finance, information systems, human resources and administrative activities.

General and administrative expenses were $6.3 million and $12.3 million in the second quarter and first six months of 2009 respectively, compared to $5.4 million and $12.4 million in the comparable prior year periods. Unfavorable expenses in the second quarter of 2009 resulted primarily from higher legal fees and a $0.6 million increase in bad debt expense (primarily related to our European operations), offset partially by lower payroll related costs and professional services fees. Favorable expenses in the first half of 2009 resulted primarily from lower payroll related expenses and professional services costs, offset somewhat by higher legal fees and bad debt expense.

Amortization of Intangible Assets

Amortization expense was $0.2 million and $0.5 million in the second quarter and first six months of fiscal 2009, respectively, compared to $0.3 million and $0.6 million in the comparable 2008 periods. These expenses relate to intangible assets recorded in connection with the Company's 2004 ABDick acquisition, patents and other purchased intangible assets.

Restructuring and Other Charges

During the first half of 2009, the Company initiated certain cost reduction efforts related to the US and UK operations. The Company has recorded expense of approximately $0.1 during the first six months of 2009 related to these actions. There are no additional expenses to be incurred related to this event. These expenses are expected to be fully paid by year-end. These amounts are recorded on the restructuring and other charges line in the consolidated statements of operations.

In the second quarter and first six months of 2008 the Company recognized $0.6 million and $1.2 million respectively of restructuring and other related costs associated with our business improvement plan as well as charges related to the impairment of long-lived assets located at our South Hadley, Massachusetts facility.

Goodwill

In order to complete the two-step goodwill impairment tests as required by SFAS 142, Goodwill and Other Intangible Assets, the Company identifies its reporting units and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. In accordance with the provisions of SFAS 142, the Company designates reporting units for purposes of assessing goodwill impairment. SFAS 142 defines a reporting unit as the lowest level of an entity that is a business and that can be distinguished, physically and operationally and for internal reporting purposes, from the other activities, operations, and assets of the entity. Goodwill is assigned to reporting units of the Company that are expected to benefit from the synergies of the acquisition. Based on the provisions of SFAS 142, the Company has determined that it has one reporting unit in continuing operations for purposes of goodwill impairment testing.

The Company's impairment review is based on a combination of the income approach, which estimates the fair value of the Company's reporting units based on a discounted cash flow approach, and the market approach which estimates the fair value of the Company's reporting unit based on comparable market multiples. The average fair value is then reconciled to the Company's market capitalization with an appropriate control premium. The discount rate utilized in the discounted cash flows analysis in the quarter ended July 4, 2009 was approximately 16%, reflecting market based estimates of capital costs and discount rates adjusted for a market participant's view with respect to execution, concentration, and other risks associated with the projected cash flows of the individual segments. The peer companies used in the market approach are primarily the major competitors. The Company's valuation methodology requires management to make judgments and assumptions based on historical experience and projections of future operating performance. The Company's policy is to perform its annual goodwill impairment test on the first business day of the third quarter of each fiscal year.

. . .